How To Realistically Set Your Fees - Part 4
Effect Of Bad Debts
So far, we have covered the major factors involved in setting
your fee structure. We have set a realistic number of billable
hours, calculated the effect of expenses and taken into account
the cost of a benefit package.
This has brought us to an hourly rate of $77. By charging $77
per hour, you will have an income of $46,000 per year, plus
benefits.
What happens when you have a client that does not pay you for
your services? What happens if a customer goes out of business
before your invoice is paid? How will these events affect your
own planning? Do you want to take a bad debt write off on your
taxes? Do you want to try to include for these contingencies in
your fee structure? Your answers to these questions will have a
direct impact on how you operate your business.
Thankfully, unless you provide very poor service, most clients
will eventually pay you. However, it may take you awhile to
collect your money and you may have to settle for less than the
originally billed amount. You have the option of adding late
fees to your invoices, but keep in mind, the more time you spend
trying to collect a past due invoice, the less time you have to
devote to paying customers. Also, if you need to engage an
attorney or collection agency, you will in all likelihood, not
see the full amount of your invoice because of their fees.
One way in which you can protect yourself is to build into your
fees an allowance for bad or uncollectable debts. If you
estimate that 5% of your invoices will be either unpaid or
underpaid, then add 5% to your hourly rate. For example, your
hypothetical fee is now $77 per hour, 5% of that is $3.50, added
together gives you a rate of $80.50 per hour. If we round this
off to $80, you would have approximately $3300 per year cushion.
Allowing 5% for bad debts may seem high, however, keep in mind
the present state of the economy and remember this figure can be
adjusted as the economic conditions change. Today, it is not
unusual for businesses to take longer to pay invoices then they
did a couple of years ago. Most businesses expect to pay late
fees for overdue invoices, however determining how much to
charge and whether or not you are meeting the various legalities
involved can be time consuming. It may be easier to add a
percentage to your overall fees to offset bad debt. In a sense,
you are spreading the economic risk over all your clients. For a
small business this may be the safest and less time consuming
course of action.
If your client base is large enough, a certain percentage of
your customers will go out of business, leaving you with unpaid
and uncollectable invoices. There is little chance you will
collect any money in a bankruptcy hearing. To protect yourself,
you can charge partial fees as your work progresses. This way
you are assured of having received at least some of your money.
Not all businesses are set up to take advantage of this option.
Remember, you are not in business to give away your services.
Your goal is to provide yourself and/or your family with a
reasonable income. Uncollected invoices are part of doing
business, you owe it to yourself to consider this before you get
stuck.
Copyright 2000, DeFiore Enterprises.